InterDigital Inc (IDCC) 2020 Q4 法說會逐字稿

Good day, and welcome to the Interdigital, Inc. Fourth Quarter 2020 Earnings Call. Today's conference is being recorded. And at this time, I would like to turn the conference over to Tiziana Figliolia. Please go ahead.

Thank you. Good morning, and welcome to InterDigital's earnings conference call for fourth quarter and full year 2020. I'm Tiziana Figliolia, Vice President of Finance and Investor Relations, and with me in today's meeting are Bill Merritt, our President and CEO; and Rich Brezski, our CFO.

Consistent with last quarter's call, we will offer some highlights about the quarter and the company. And then I'll open the call up for questions. Before we begin our remarks, I need to remind you that in this call, we will make forward-looking statements regarding our current beliefs, plans and expectations, which are not guarantees of future performance and are subject to risks and uncertainties that could cause actual results and events to differ materially from results and events contemplated by such forward-looking statements. These risks and uncertainties include those set forth in our earnings release and our annual report on Form 10-K for the year ended December 31, 2020, and from time to time in our other filings with the Securities and Exchange Commission. These forward-looking statements are made only as of the date hereof, and except as required by law, we undertake no obligation to update or revise any of them, whether as a result of new information, future events or otherwise.

In addition, today's presentation may contain references to non-GAAP financial measures. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures are included in our fourth quarter 2020 financial metrics tracker, which can be accessed on our homepage www.interdigital.com by going to the Investors section of the website and clicking the link that says financial metrics tracker for Q4 2020.

Finally, with the pandemic still a concern, the participants on this call are all in separate locations. If there is a technical issue during the call, I will just ask everyone to be patient, while we exercise a fallback option.

With that taken care of, I will turn the call over to Bill.

Thank you, Tiziana, and good morning to everyone, and thank you for joining us on the call this morning. Similar to past calls in these difficult times, I hope all of you are staying well. As you saw in the press release issued this morning, the company delivered both an excellent quarter and, frankly, a fantastic year, while managing our way through the COVID crisis. I'm also pleased to announce that we have signed in the first quarter of 2021, a license agreement with Humax, a South Korean manufacturer of set-top boxes, DVRs and other consumer electronics. So our consumer electronics business continues to progress nicely.

This is our Q4 earnings call, so let me recap the year 2020 and then talk about our objectives for 2021. So you get to read about -- read more specifically about the goals we set for ourselves in 2020 and our proxy, but in a nutshell, they were to: drive revenue; to drive other deals down the playing field and get them closer to completion; continue to innovate; and continue the positive evolution of the company in terms of talent and processes.

And then COVID hit. In a reflection of the strength of the organization the company was nonetheless able to deliver on and, in some instances, exceed our goals, while also managing our way through the pandemic. On revenue generation, we delivered our best revenue year since 2017, signed 6 new deals, including the renewal with Huawei. We also moved a number of deals down the field, positioning us in 2021 with negotiations that have significantly matured and are positioned to close. We also commenced litigation against other companies where negotiations had not matured and were we believe litigation was appropriate. In addition, we continue to be a top leader in the licensing industry as demonstrated by the company's industry-leading efforts to provide transparency into our rate structure and patent.

Finally, in some cases, we drove regulatory and legal change that dramatically improved the licensing environment. On innovation, we had another standout year despite our engineers and scientists working remotely and the standard organizations we contribute our innovation teams and sales working remotely.

Hardly enough because our research teams already collaborated across our R&D sites, the transition to a remote work environment was pretty seamless, as the teams were already well equipped in versing via Zoom and other platforms. The result was great innovation, great contribution to standards and more of the advanced thinking the company is known for.

On the people and process side, we've brought some fantastic talent into the organization, demonstrated to ourselves into the world, how attractive we are as a company, how much people believe in the opportunity we have ahead and how enjoyable and actually challenging the work at InterDigital can be. Indeed, for a relatively small company, we have an outsized opportunity to drive groundbreaking innovation, be a thought leader on licensing, driving legislation and invent new ways of working. We captured much of that when we rolled out the updated mission for the company, which is inventing the technologies that make life boundless.

Due to combination of our innovation in the key spaces of wireless and video and our unique business model of making that technology available to all, we have helped to untether the world from wires, remove the constraints of geography and bring the world joys of friendship, knowledge, music and beauty to anyone anywhere. We're really proud of what we do.

We're also very proud of how we responded as a team to the pandemic, and we roll into 2021 even stronger and ready to deliver on several key goals for the year. The first will be continued revenue growth. As I mentioned earlier, we moved deals down the field in 2020. Now it's time to push them over the goal line, led by uniquely qualified licensing team. And while it's always difficult to say when and what kind, our objective is to drive new meaningful deals on both the wireless and the consumer electronics side, as we just did with Humax.

A comment on Humax. For those of you who do not follow the set-top box market, Humax is about the #5 or 6 set-top box manufactured in the world in terms of worldwide sales. Concluding a deal with them is notable in its own right. Also the completion of this agreement -- with the completion of this agreement, we now have signed benchmark agreements in 3 key areas of our consumer electronics licensing plan. Those would be digital TVs (inaudible), set-top boxes for non-HEVC patents, with the latest Humax deals represented and then a third deal specifically around HEVC only.

With these 3 deals, along with (inaudible) one, we have concluded since we acquired the business in Technicolor, we continue to be confident in reaching the revenue goals we have set for the consumer electronics program.

Moving on to our other 2021 objectives, we will continue to drive wireless and video innovation to be measured by our contribution to worldwide standards, patent filings, publications and other thought leadership. Of importance to our research team will be 6G. 5G certainly will do its job in creating a flexible network that can handle a wide variety of use cases from talking to web browsing to connecting billions of machines to supporting self-driving cars.

Part of 6G's missions will be to make all of that happen faster, using less power in a less reactive and more predictive way. This will mean inventing and adapting solutions that push more processing to the edge, drive higher and dramatically faster compute power and that leads in artificial intelligence and machine learning. And those are the types of innovation at which we excel. 2021 will also be a year of higher focus on sustainability. The company has historically done many good things on the environmental, social and governance front. We just didn't really (inaudible) them.

That said, the (inaudible) of the trifecta of the pandemic, the Black Live Matters protest and the capital light made clear that it is really, really important, not only to lead by example and be more vocal about what we do, but also to do more to drive a more vibrant and sustainable world. So that is what we intend to do.

In terms of technology, that means creating innovation that helps reduce the carbon footprint of wireless technology or that helped drive the adoption of wire technologies into industries where that technology can reduce the need for truck rolls, travel and other energy-intensive activities.

In terms of our company, it means driving greater diversity from the top to the bottom of the organization, giving back to our communities and rethinking the future of work to better balance people who need to bid, thrive and connect. It helps to need to do all of that from a position of strength, thanks to the effort of the team in 2020. That is where we are. And it's the same team that is poised to deliver great things in 2021 and beyond.

With that, let me turn it over to Rich.

Thanks, Bill. As Bill said, we delivered tremendous results in 2020 with an increase of nearly $40 million in recurring revenue. I would like to take a moment to emphasize, once again, the importance of operating leverage in our business model since it is exemplified by our 2020 results.

While our top line increased $40 million or 13%, our operating expenses increased just 8%. Better still, when you adjust for litigation expense and a full year from our expanded research team, the year-over-year increase in operating expense was less than 3%. As a result, our 13% increase in the top line drove a 46% increase in operating income. This is a great result for 2020, but more importantly, it is a clear demonstration of how valuable our operating leverage is during periods of growth.

Of course, we recognize that we need to continue to drive top line growth to fully take advantage of this leverage. As Bill noted, in addition to enforcing our intellectual property rights against Xiaomi and Lenovo, we've made progress in 2020 for license agreements with both additional mobile handset and consumer electronic manufacturers. We believe we have made fair offers across the board, and we are pleased to see growing worldwide recognition that manufacturers have a responsibility to pay fair royalties. We believe this sets us up to drive resolutions to new and meaningful license agreements in 2021 and/or support compelling arguments where counterparties have failed to negotiate responsibly.

We continue to believe that between just mobile and consumer electronics, in the long term, we can deliver roughly $300 million of additional recurring revenue on top of our 2020 run rate. Better yet, we believe we can achieve this top line while targeting inflationary level growth and operating expenses. That is outside of sharing roughly 1/3 of our $150 million consumer electronics revenue target with partners. We believe our 2020 results support our ability to deliver on this target.

Moving on. We delivered over $120 million of free cash flow in 2020, an increase of $70 million, which more than doubles 2019 levels. As is typically the case, our [intra period] cash flow was a bit choppy with use of cash in the first quarter and strong free cash flow over the balance of the year, in particular, the second and third quarters.

Also typical for our business, a portion of the 2020 receipts related to future periods. We ended the year with total cash and short-term investment balance of $926 million. This represented a small increase over the prior year-end despite $138 million in debt repayment and dividend payments. Looking forward, we believe our sizable cash balance puts us in a strong position to continue enforcement of our patents and to make organic investments, all while considering inorganic investments and share repurchases in 2021.

To remove any chance to [miscommunication], such considerations are normal course and will be made with the same careful focus we have employed in the past.

Finally, we will provide our expectations for Q1 revenue in a few weeks after we have received our final Q4 quarterly reports.

Thank you, Rich, and thank you, Bill, and we will now open the call for questions.

(Operator Instructions) Our first question comes from Eric Wold with B. Riley Securities.

A couple of questions. I guess, one, Bill, maybe give us a sense, you talked about a lot of the negotiations you've been having kind of progress to the point where you think they're close to closing and others did not, you resorted to litigation. I guess maybe give us a sense of what is the difference between the 2? I mean, what gives you the confidence that something is close to potentially closing versus not, kind of what are those signals? And kind of -- maybe kind of what's been the hit rate of negotiations that have hit that point before?

Yes. So look, it's obviously something that comes from years of doing this, right? I think the simplest thing is movement, right? So you can have a considerable gap between the parties, but there can be movement, like they could be inching closer to each other. And so that's something that you're just going to allow to play out and see where it lands. So movement, I think, is is very important.

I think second is if there's not movement, the question is, can you figure out why. And sometimes, there could be a really legitimate business where you understand what the other side is at. And it's not -- they're not really positioning themselves for litigation, but they're going through a period of time in their business when movement is not something they can do. So there's a bit of patience that comes into that.

Third is sometimes you feel like the other side may actually be positioning things for litigation. And while you don't want things to be a race to the courthouse, there's some value being first, sometimes. So you kind of sense that. Oddly enough, you have customers that will actually outright invite litigation because it's how they can raise the profile of the negotiation within their company. And so you think about that.

Probably the other reasons too, but those are 4 that come to mind.

Okay. That's fair. And then on the CE business, you talked about the kind of the benchmark licensing deals we've done within digital TV, set-top boxes, HEVC. Do you think that business is now with those benchmark deals? Is that a point where it can hit an inflection in terms of getting a major deal across the line to get you closer towards that $150 million revenue target? Or there are more benchmark deals that need to be done within those spaces?

Yes, I don't think we need any more benchmarks, right? So it is valuable to have deals done with reasonable-sized companies that have -- with good IP teams and things like that. So if and when you need to litigate against a larger player, those agreements become very important in terms of any court set rate. So I think we're in good shape that we've covered, I'd say, the main products and the main technologies. We've done it with really solid companies. So I think we're in a good spot with benchmarks.

As I mentioned in my call, I think this is -- and I've mentioned to others, the conversation we have, that we really want to move the needle on consumer electronics this year. Humax is a good deal. Even though the set-top box market itself is not a big market. We're a reasonably big player in that market. So I think we're very well positioned.

Perfect. And then just final question for me. I know you typically do not guide to litigation spend, but we've seen kind of the IP enforcement costs kind of move from $18 million-ish in '18, $26 million-ish in '19, $29 million last year, kind of moving -- ticking higher. How should we think about that trajectory this year with everything you know at this point? And when would you expect that to start trending lower?

Yes. I'll take that, Eric. It's something I always say, litigation is an investment for us. It's something that we prefer not to do. But if the situation calls for it, we're certainly not afraid to do it. And I'm not saying we're totally insensitive to cost, but it's an investment that time and time again has paid off for us.

So -- while we have seen some uptick over the last couple of years, we also saw resolve deals with [ZTE] and Huawei that were under litigation not more than 18 months ago. So as for the rest of the year, we'll have to see how things play out here, but we're kind of more or less around the levels that we're at. They're going to ebb and flow. It's actually really hard to predict very far down the road where they might go because, of course, you could resolve these things or new fronts could open.

So I mean you have a bit of an unclassified answer, but I think the real message I want to convey is if we feel like we need to make the investment, we're going to make it.

We'll take our next question from Derek Soderberg with Colliers Securities.

Bill, I wanted to start with deal renewals. I mean, it sounds like the confidence there. There's definitely some confidence there. I'm wondering, is there a lot of potential growth in the deal size as those customers renew? I guess I'm wondering if these renewals in Apple and Samsung will likely include patents maybe related to Technicolor? And then I have a follow-up.

Sure. So on growth, I think growth for us is going to come in the short term, mostly from new deals, right? So things like by Humax today and those litigation with folks like Xiaomi and Lenovo, they would all be new customers. I think that's a pretty big driver of growth.

When you think about renewals, so you have a little bit of a mixed bag to answer your question with respect to Apple and Samsung. Absolutely, the technologies that we've acquired and developed since the last deal with those folks will be front and center in a new negotiation with them. So that's great.

On other renewals, so as an example, LG, they're -- I think as people are aware, they've signaled that they're going to have strategic options process underway for that handset business, which has really declined over the last couple of years. So we're in conversation with them and the renewal there with -- would be at a lower value than the prior because the business is at a lower value. So -- but other than that, I think, as I said, the major revenue growth for the company is going to come from signing people that have never been licensees before and then the renewals will be, in some cases, if their business has declined, it will be a lower level, but for people whose businesses are better or even the same, we bring more to the table in that next negotiation.

Got it. And then as my follow-up, I think you guys have some good visibility into the Biden administration. Now that we're starting to see some more policies come out, executive actions taken and such, how has your view evolved on the new administration so far? And maybe as it relates the FTC and their views on patent trolls or anything related to that? How might that impact new deals or resigning existing ones?

Sure. So yes, I think there's 3 aspects of the administration that we would be focused on: one, is their approach to China; second would be their approach to IP generally; and I think third would be other things like tax and other stuff, I'll let Rich handle the last and I'll do the first 2.

So on China, what we've seen, and I'm sure many of you have seen this, too, for example, I think he was the [Secretary State] (inaudible) when he classified, he actually agreed with the Trump objectives in China. I think the approach will be different. I think it's going to be more of a coordinated approach with the Europeans and partnership with Europeans with respect to China, but I think the ultimate objective is the same. And so that's a good thing.

And as you may have seen, there was recent legislation proposed in Congress actually proposed by Republicans to provide additional tools for securing royalties from Chinese companies shipping into the United States under -- and using standard essential patents. So hopefully, that legislation moves forward. There's also the stronger patent back, which we're very supportive of, and we believe the administration would be as well. And so I think that speaks generally to their support of IP. I think that we've all come to recognize that the prior narratives used by tech against patents was a false narrative. And that it's really important to have a strong patent system, and I think that, that's generally the Biden administration is going to be, at least supportive of that. As mentioned before, Senator Coons from Delaware is a very, very strong supporter of patent office and obviously a friend of the President and the administration. So I'll let Rich handle the other tax matters.

Yes. Thanks, Bill, and welcome, Derek. Glad to have you on the call. On the tax side, really, nothing dramatically changed since our -- we most recently expressed our views there. We see a number of, at least in the short term, moderating factors, whether it's the composition of the Senate, concerns about the impact of the pandemic on the economy and midterms. So we're not anticipating anything in the short term, but it's obviously something that we're going to watch pretty closely to see how it develops over the longer term.

Our next question comes from Scott Searle with ROTH Capital.

Maybe quickly to follow-up on some of the litigation questions. Could you just give us a quick update, Bill, in terms of where we are in terms of both Xiaomi in India and Lenovo in the U.K., the next steps over the next couple of months, if we're tracking what that earlier time line currently look like.

And then I guess to follow-up on Eric's earlier question. In your language in the script, you referenced players that were misbehaving to kind of push to the litigation route. So should we read anything into that in terms of players that you -- or OEMs that you are not currently litigating with that they are much closer along in the process, i.e., Vivo, Oppo, some of the other Chinese manufacturers or don't read into that?

Sure. So there's a pretty robust description of litigation in the 10-K. So are we -- referring you to that for sort of the details. Let me just give you a sort of a high level view of where things are at. So with respect to Lenovo, there's a series of cases involving them, there's the U.K. case, there's the U.S. Delaware base case and then there's cases going on in China. I think that the leading case there is the U.K. case. I think from a timing standpoint, it's the most mature. We have a trial starting in March. As you recall that case, the way the U.K. system works is, there's a number of technical trials. Those are basically patent infringement and validity trials and then sort of stuck in the middle of the technical trials is the FRAND determination, and that is scheduled for early 2020 -- 2022, sorry.

So I think that, that -- those cases they're pretty well developed. And we feel good about the technical cases, and we feel good about the FRAND trials. And the beauty of the U.K. system is that there's that opportunity to get the worldwide [licensees] and resolve the matter completely.

With Xiaomi, again, set of litigations around the world, India, China, some other places. Both the China and the India cases have moved slower than one would have anticipated. It's hard to say exactly why. There's always -- courts are operating remotely, so there's always the impact of COVID, but there's other -- there's the uncertainty of litigation as well. So I'd say not quite as mature as the Lenovo litigation. But obviously, there's a lot going on there.

And litigation also generally provides an opportunity for the parties to talk, right? It's an expensive one to get people to talk, but they do talk.

On your question of if somebody is not in litigation doesn't mean that the partnership (inaudible). Not necessarily. But back to the answer, again, Eric, on why we bring litigation from time to time. It's -- it could be that the parties remain far apart, but that -- there's movement. And so you want to let that play out without drawing a line in the sand. As long as we're seeing movement, there's no reason not to continue to engage with the customer in a positive way. So it could be that a deal is still ways off in time because it can take a while to close the gap, but it does not make sense in that case to bring litigation. So I wouldn't necessarily read into whose been -- who (inaudible) in terms of whose close to the deal and who's not.

Got you. And lastly, if I could, on the variable royalty front. Was up a little bit this quarter. Are you starting to see then the pickup as it relates to video and/or IOT? I was wondering if you could give us a quick update in terms of where video came ended the quarter and where Avanci is at the current time.

Yes. So I think some of that pickup is just a reflection of the pandemic and the economy and maybe even a little bit of seasonality. Again, we have comparatively fewer licensees there, but more on the variable side. So we'll gain more and more understanding of these markets and the trends as we sign more deals and move forward. Right now, you can have 1 or 2 licenses, have a royalty report come out unexpectedly high that leads to a true-up and cause you to increase your estimates going forward.

So I think that will probably settle down over time. But definitely, part of it was a level of -- again, we have to, in most quarters, estimate the royalties for the quarter without really being involved in the supply chain. So we're [not -- in] a great position, at least compared to anybody else to make those estimates. We have to look at history and current factors, and then they get trued up when we get the reports in the following quarter. And that true-up will obviously influence our estimate for that quarter.

So what we've seen in the second half of the year is -- things were a little bit better than maybe we would have expected during the pandemic, so there were positive true-ups.

Kind of an ongoing recurring basis, we're still running roughly in the same levels that we've been talking about on the CE side in the neighborhood of 10% of that goal. We'll look forward to some help from Humax in Q1.

We'll take our next question from Ian Zaffino with Oppenheimer.

This is Mark on for Ian. So I guess just a quick follow-up on the prior question on litigation. It seems like there's some new case filed in Germany with Xiaomi. Can you guys just provide a little bit more details there. Is it something more meaningful? Or how should we sort of interpret this going forward?

Sure. So -- again there's descriptions in the K, but to -- not surprising in litigation, sometimes these things spread out to various jurisdictions. The reasons for that can be different, right? So it could be that you're securing certain rulings from the judge to sort of work what may be going on in China. And I think that's an area of the law that we've been pushing. You've also seen Ericsson and others push that as well that kind of take what was a very aggressive stance by the Chinese on trying to almost claim exclusive jurisdiction on those matters and having courts around the world push back on that. And it can also -- there's other purposes for litigation [without getting into] Xiaomi or anyone else specifically, it could be that you want to start another front of (inaudible) simple patent litigation.

So I wouldn't -- it's a little bit of a chest game that goes on in litigation, and I'd say that this is just another chest move.

Okay. That's fair. And then, I guess, like just another one. On the LG contract, I know right there's been news that they're looking to exit the smartphone space. How has the conversation with them going? And have you guys engaged or sort of on maybe like anything on the CE side with LG that you guys could provide?

Sure. So look, LG has been a customer of ours for quite some time. And you're correct, there's 2 different areas where we can have conversations with LG and do have conversations with them. One is on mobile, where they have been a customer for a long time. The new one is on the CE, particularly around their televisions.

On their mobile side, these are people that we've developed relationships with, and they're very straightforward. And as I mentioned, I think also, Eric or somebody else earlier in the call, sometimes there's just practical situation that's confronting with someone that you need to respect. It doesn't mean there's not an opportunity to license. There absolutely is because if the business gets sold, it needs to -- we would want the buyer to have a license. If the business gets shut down, there's going to be sales during the stub period that we would want covered. So there's a lot of really good reasons to continue to engage with them and secure renewal on the correct terms. But I think you just have to also respect where people are at in their life. And if they're very focused on trying to figure out what to do with the business, you need to give them a little space to do that.

Okay. Sure. That's helpful. And then just finally, a quick one. I know it's hard to gauge on the long-term on the -- on your sort of the operating expense side. But any sort of like a sense of moving parts going to 1Q '21 for the operating expenses, whether it's litigation or patent management? Anything that would be very helpful.

Yes. The other thing that I'll highlight there is that for the last 2 years since we acquired Technicolor's patent portfolio, we've had a robust effort to bring those costs in line. We feel like we've done a very good job with that, had a little bit of a charge associated with some of the activities towards the end of that initial process. Patent management is an ongoing effort. We have a very large portfolio. And like any company with a large portfolio, we have to stay on top of it and make sure that we're directing our resources to the best assets. So that's an ongoing effort. We now have a full year under our belt with the -- full calendar year, with the research team. So we see expenses being a little bit more stable than maybe they've been over the last 2 years. And again, as I said, one of the things that we come back to again and again is our appreciation for the operating leverage that exists in the model. That was a theme in my prepared remarks today. When you're in periods of growth and you can drive that top line without really having a meaningful movement on the operating expense line, it has a tremendous impact on bottom line results. So that's what we're focused on continuing.

We will take our next question from Anja Soderstrom with Sidoti.

It's been -- a lot of good questions asked and good discussion already. But as you have now sort of incorporated the Technicolor fully, are you -- what do you see in terms of M&A and where you could head in that direction? And what do you see in the market?

Sure. So as Rich mentioned in his script, obviously, we're in a good position to pursue M&A if we wanted to. So in terms of what we would be interested in, I think it's a couple of things that would be, I think, fairly obvious. So with consumer electronics business we have today, I think is strong. It includes a wide variety of patents from broadcast standards to WiFi to HEVC to product-specific implementations. And we have R&D, obviously, behind that, creating new innovation. But I think that there's opportunity to further strengthen that in a way -- so I'll give an example. So Wi-Fi portfolios don't come on the market all that often, but when they do, they're interesting to us because they would cut across all of our programs. And so that's an example of a technology that would be a portfolio that would be interesting to us. And it's also very synergistic with the R&D that we already do.

Beyond that, I think additional investment in video, particularly standard based patents would be interesting again because it cuts across all of our licensing program. So -- and from time to time, that stuff becomes available. So I think we look at things that are going to be widely applicable or broadly applicable across our programs because that's the best way of ensuring that we're going to drive the right return from the deployment of that capital.

In terms of the opportunities, it's interesting. We -- there was a little bit of a rush at the beginning of the pandemic. And actually, from our standpoint, at least the things that we were interested, it kind of slowed down. But now, we've seen more of a pickup in a variety of opportunities that come through. The opportunities kind of fall into 2 categories. One would be simply portfolios, and those are interesting to us because it again, they can get quickly deployed into our business. From time to time, it's operating companies as well. And if there's something interesting, we kick the (inaudible). But I'd say there's been a little bit of a pickup over the last quarter or so in terms of M&A opportunities.

And at this time, I'm showing no further questions.

Thank you, Casey, and thank you for joining us today. This concludes our call, and we look forward to giving you an update next quarter.

Ladies and gentlemen, this concludes today's call. Thank you for your participation. You may now disconnect your phone lines.